What’s Behind P&G’s Strong Quarter

P&G announced strong quarterly results last week.  So did several other CPG businesses.  Notwithstanding all of the worries about the strength and resilience of consumer demand, many of the big CPG companies seem to be doing relatively well.

The question, of course, is why.  What are these companies doing that is working?  What do they know about consumers?  What can be learned from their successes about the recovery consumer value equation?

The answer is innovation.

In announcing P&G’s results, Chairman and CEO Bob McDonald scoffed at the notion that frugality has hijacked consumer aspirations.  As reported in AdAge, McDonald argued “that while consumers may remain cautious with their money, trade-down isn’t inevitable.”  Indeed, said McDonald, “I think this idea that this economy is causing everyone to trade down is a little bit overly general and too broadly applied.”

This is exactly right.  As noted before on this blog, interpreting consumer behavior as evidence of frugality commits two classic interpretive errors.  Some consumers have become frugal, and some of them will continue to be frugal for the long-term.  But that is not true of most nor is it the key dynamic shaping the future marketplace.  P&G obviously sees this, too.

What has enabled P&G’s success is not marketing to frugality but product innovations.  Again, from AdAge: “Chief Financial Officer Jon Moeller said the quarter showed some vindication for the company’s strategy of innovating both on the premium and value ends.”  Through innovation, P&G has connected with the recovery consumer mindset.

Of course, this is not to say that every CPG company has succeeded in this way.  But many have done so, and even if others have succeeded by cutting prices, this is not the only way to succeed.  If a frugal mindset was all that mattered, then only price-cutting would work; innovation would have no chance.  Innovation is working for P&G and others because the key dynamic at work in the marketplace is not frugality.

Instead, as discussed in detail in A Darwinian Gale, the lesson of the Great Recession of 2008/2009 is risk.  Risk creates uncertainty, which upends the old value equation.  In the search for new value, consumers are open to innovation, perhaps more so than ever before.

As P&G CFO Moeller notes, P&G’s innovation has been at both ends of value, high and low.  This is crucial to note.  Innovation is not inherently premium-priced.  It is a false dichotomy to pose innovation and low price as polar opposites.  They are not.  In fact, in this economy, the best innovations are those that are also low-price leaders.  P&G has pursued innovation in premium-price offerings as well as innovation in low-price offerings.

Innovation up and down the price continuum is essential in this economy.  Consumers don’t want the same old things anymore, even if they are the cheapest.  For whatever price they pay, consumers want innovation.  The recovery consumer marketplace is about a new value equation, not the cheapest value.  Innovation is always important, but it is cost-of-entry now.  [J. Walker Smith]

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